BREAKOUT

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BREAKOUT SESSIONS
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PFS CONFERENCE 2007USING PROPERTY IN TAX
PLANNING

• John Woolley
• Technical Connection

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TAX PLANNING USING PROPERTY

• WHY ITS IMPORTANT
• Explosion in property prices
• Explosion in property investors
• More people with more wealth derived from
  property
• Tax planning can improve the bottom line!

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• PRE-BUDGET REPORT
• 2007

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PROPERTIES WE WILL CONSIDER
SECOND PROPERTIES
PRINCIPAL PRIVATE RESIDENCE
BUY-TO-LETS
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TAXES WE WILL CONSIDER
SECOND PROPERTIES
PRINCIPAL PRIVATE RESIDENCE
BUY-TO-LETS
INCOME TAX CGT IHT
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PRINCIPAL PRIVATE RESIDENCE

• CGT
• PPR Exemption
• Time apportionment
• Periods of absence
• Last 3 years ownership counts as part of
  exemption irrespective of occupation

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PRINCIPAL PRIVATE RESIDENCE

• CGT
• Letting exemption
• Relief of up to 40,000 of let value per owner
• 80,000 for married couple
• MUST occupy as a residence

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PRINCIPAL PRIVATE RESIDENCE

• CGT PPR EXEMPTION
• Business use restriction
• Rent-a-room doesnt affect PPR exemption

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PRINCIPAL PRIVATE RESIDENCE

• INCOME TAX
• Rent-a-room
• - Letting income of 4,250 per annum
• or
• - Elect to tax as property business or pay
  income tax on excess rent

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PRINCIPAL PRIVATE RESIDENCE

• Inheritance Tax
• Planning via the Will
• Lifetime planning

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INHERITANCE TAX THE NEW GOVERNMENT PBR PROPOSALS

• Increase of nil rate band to 350,000 in
  2010/11
• Husband and wife have COMBINED nil rate band
  of 600,000
• Can use up to 300,000 on first death or
  transfer percentage not used to survivor for use
  on second death

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EXAMPLE BOB AND SUE
Bob Dies on 1/12/07 when nil rate band
300,000. Leaves all estate to Sue (wife) No IHT
(spouse exemption) Sue dies on 1/12/10 when nil
band 350,000 Sue is entitled to 700,000 nil
rate band
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EXAMPLE JOHN AND GEORGINA
John Dies on 1/12/07 when nil rate band
300,000. Leaves 150,000 to children, balance of
estate to Georgina (wife) No IHT but uses 50 of
NRB Georgina dies on 1/12/10 when nil band
350,000 Georgina is entitled to a nil rate band
of 525,000 (150 of 350,000)
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NEW NIL RATE BAND PLANNING

• Can only transfer one nil rate band however
  many spouses you have had in past
• Applies on second deaths from 9/10/07
• Can transfer nil rate bands of spouses who
  died before 9/10/07 this affects IHT
  calculation of widow/widower
• PRs make election within 2 years of second
  death

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IHT PLANNING POST PBR CHANGES
Married couples with estates of up to combined
NRB Mr and Mrs Brown House 450,000 Investments
100,000
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MR AND MRS BROWN

• No lifetime planning necessary
• No NRB first death planning generally necessary
• UNLESS

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REASONS TO USE NRB ON FIRST DEATH

• Second marriage and different children to benefit
  from half share on second death

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REASONS TO USE NRB ON FIRST DEATH

• Second marriage and different children to benefit
  from half share on second death
• Desire to move assets away from surviving spouse
  (local authority care charge)

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REASONS TO USE NRB ON FIRST DEATH

• Second marriage and different children to benefit
  from half share on second death
• Desire to move assets away from surviving spouse
  (local authority care charge)
• You think assets given on first death will
  increase in value at a greater rate than the
  increase in nil rate band

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REASONS TO USE NRB ON FIRST DEATH

• Second marriage and different children to benefit
  from half share on second death
• Desire to move assets away from surviving spouse
  (local authority care charge)
• You think assets given on first death will
  increase in value at a greater rate than the
  increase in nil rate band
• You intend that loans are made from the trustees
  to the surviving spouse to reduce his/her taxable
  estate

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REASONS TO USE NRB ON FIRST DEATH

• Second marriage and different children to benefit
  from half share on second death
• Desire to move assets away from surviving spouse
  (local authority care charge)
• You think assets given on first death will
  increase in value at a greater rate than the
  increase in nil rate band
• You intend that loans are made from the trustees
  to the surviving spouse to reduce his/her taxable
  estate
• Divorce/insolvency protection
• You qualify for double NRB despite still being
  married!

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REASONS TO USE NRB ON FIRST DEATH

• AND if using house in first death planning
• It can be complicated because need to secure
  survivors tenancy but avoid an IIP
• Convert to IIP trust more than 2 years after
  death
• Use IOUs or Charge Scheme

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AND FOR THOSE WEALTHIER CLIENTS
Mr and Mrs Blair Private residence 950,000 Inve
stments 550,000
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Give it away and live in it

• POAT? Gift with reservation? CGT?

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Give it away and pay a commercial rent

• No gift with reservation!
• CGT on future growth in Donees hands

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Give it away to a current occupier

• No gift with reservation S102B FA 1986
• Donor must pay fair share of outgoings
• Care if Donee dies/moves out
• No CGT problem if Donee continues to occupy

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OTHER INHERITANCE TAX PLANNING WITH HOUSE?

• Family Debt arrangement
• Sale to Offshore Insurance Company

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SALE TO OFFSHORE INSURANCE CO
Sale guarantee to remain in occupation
O/S INSURANCE COMPANY
BOND
Bond in Trust

• Children have option to buy back
• Gift is a CLT OR PET
• Income tax charge on Bond
• Charges

Property Fund
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2. THE SECOND HOME - CGT

• Position generally improved under PBR
• Higher rate taxpayers
• 18 (new) vs 24-40 (old)
• Basic rate taxpayers
• 18 (new) vs 12-20 (old)

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THE SECOND HOME - CGT

• PPR ELECTION
• Within 2 years of acquiring second property
  nominate PPR
• Nominate new property pre sale
• Must have lived there
• Last 3 years free of CGT

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THE SECOND HOME - CGT
PPR election - Effect

• Second property gain 100,000 over 10 years
• If nominated as PPR at least 30,000 free of
  CGT

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THE SECOND HOME IHTLIFETIME GIFT
Donor

• No SDLT
• CGT-claim hold-over

Discretionary Trust CGT ? GWR ?
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THE SECOND HOME IHTLIFETIME GIFT
Donor

• No SDLT
• CGT-claim hold-over
• IHT CLT so dont exceed available NRB.
  Joint Settlors?

Discretionary Trust
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THE SECOND HOME IHTLIFETIME GIFT

• No SDLT
• CGT-claim hold-over
• IHT CLT so dont exceed available NRB.
  Joint Settlors?
• Continued occupation - GWR (unless the de
  minimis rules apply) Pay market rent for
  period property occupied

Donor
Discretionary Trust
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THE SECOND HOME IHT WILL TRUST PLANNING

• Tenants in common
• Discretionary Will trust (if appropriate
  consider new NRB rules for spouses)
• Not continuous occupation so no IPDI problems

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3. BUY-TO-LET

• Taxed as Property Business (unless FHL)
• Offset interest paid on loans against rental
  income
• If rents reduce, losses can be carried forward
  against later rents

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BUY-TO-LET RELEASING CAPITAL
BILL Loan 100,000 Own Cash 100,000
Buys Buy-to- Let 200,000 (2002)
Now worth 400,000
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BUY-TO-LET PLANNING POINT
Buys Buy-to- Let 200,000 (2002)
BILL Loan 100,000 Own Cash 100,000
BILL Borrows 100,000 to refinance
purchase
Now worth 400,000

• Tax relief on interest

NB Equity release cannot be greater than original
MV of property

• Can use 100,000 for whatever purpose he wishes

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BUT-TO-LET CGT

• PBR
• Higher rate taxpayers
• 18 (new) vs 24-40 (old)
• Basic rate taxpayers
• 18 (new) vs 12-20 (old)

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BUY-TO-LET CGT
EXAMPLE Average growth on buy-to-let over 5 years
85,770 Annual exemption 9,200 CGT now (5
years taper) 25,482 (taxable gain
63,705) CGT after 5 April 2008 13,783
(taxable gain 76,570)
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BUY-TO-LET CGT

• Furnished holiday letting
• Conditions
• Let on commercial basis
• Accommodation available for commercial
  letting at least 140 days a year
• Accommodation must actually be let for 70 of
  the 140 days

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BUY-TO-LET CGT
Disposal by higher rate taxpayer Before PBR
10 (75 taper relief) Post PBR 18 flat
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IHT PLANNING WITH BUY-TO-LET

• Lifetime Gift issues
• CGT
• Gift with reservation

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IHT PLANNING WITH BUY-TO-LET

• Lifetime Gift issues
• CGT
• Gift with reservation

Hold-over relief - use discretionary gift. Care
not to exceed IHT nil rate band
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IHT PLANNING WITH BUY-TO-LET

• Lifetime Gift issues
• CGT
• Gift with reservation

Hold-over relief - use discretionary gift. Care
not to exceed IHT nil rate band Give up right to
income
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IHT PLANNING WITH BUY-TO-LET

• Lifetime Gift issues
• CGT
• Gift with reservation

Hold-over relief - use discretionary gift. Care
not to exceed IHT nil rate band
Give up right to income
But is there a better way?
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BUY-TO-LET IHT
Reversion held for Discretionary Beneficiaries
IIP Trust
IIP (rental) Settlor
Taxed as Discretionary Trust for IHT purposes
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BUY-TO-LET IHT
Reversion held for Discretionary Beneficiaries
IIP Trust
IIP (rental) Settlor
Taxed as Discretionary Trust for IIP purposes

• CGT Hold-over
• No POAT
• No GWR
• But S102(A)(3) FA 1986

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BUY-TO-LET IHT
Reversion held for Discretionary Beneficiaries
IIP Trust
IIP (rental) Settlor
Taxed as Discretionary Trust for IIP purposes

• CGT Hold-over
• No POAT
• No GWR
• But S102(A)(3) FA 1986

CONSIDER EQUITY RELEASE AND GIFT OF CASH?
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PLANNING WORKS FOR NEW BUY-TO-LET
Settlor transfers cash
IIP Trust
Let to third party
Life interest - settlor No GWR S102 (A)(3) only
applies to gifts of property
Capital -Discretionary Beneficiaries (settlor
excluded)
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IHT PLANNING USING THE BUY-TO-LET VIA WILL

• Is first death NRB Will planning appropriate?
• Does surviving spouse require income/access?
• Use NRB Will Trust
• Avoid iip trust (IPDI) use discretionary
  trust
• No CGT on death

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SUMMARY

• PROPERTY
• A key area of client advice
• Maximise the tax breaks to improve the bottom
  line
• Added value that makes a difference

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